How to invest your $640 Mega-Millions

Chances are that few, if any, of those dreaming what they’d do with the $640 Mega Millions jackpot fantasize about what their financial adviser might say. That’s because these buzz kills with CFPs think lottery winners should be as boring as possible -- at least, that is, when it comes to their portfolios.

After taxes, the record payout is likely to be closer to $320 million as a lump sum. However, tickets purchased in states such as Delaware and California will be worth even more due to the lack of income tax on winnings, according to USAMega.com.

Regardless, the prize money should be more than enough to fund a lifetime of lavish spending. Too often, of course, lottery winners blow through the cash so quickly they end up bankrupt. That’s where the dullness comes in, advisers say. The winner might consider investing like a grandma, with a surefire and downright boring portfolio. "If they are conservative they can have an amazing life style year after year," says Andrew Feldman, a financial planner in Chicago. "If they take too much risk they may lose too much." (Post continues after video...)

The sheer size of such a portfolio, advisers say, makes it possible to earn an outsize income with ultra-conservative investments. And lottery winners wouldn’t even have to spend a dime of their actual winnings to maintain millionaire lifestyles. Taken to the utmost extreme, investors could keep the entire stash in cash as three-month Treasury bills, where the $320 million would earn 0.07%, or $224,000. But no one needs to be quite that conservative, advisers say.

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Instead, one approach could be to put half the winnings in high-grade municipal bonds, where the income earned is tax exempt, says Matthew Goff, a financial adviser in Houston. That could bring in roughly $3 million a year in income, he estimates. Another 40% of the winnings could be put in high quality corporate bonds, where it could earn about $2 million a year. And for the sake of helping the jackpot keep pace with inflation, the rest of the cash could be invested in dividend paying stocks.

All told, that adds up to an annual income stream of about $7 million, that winners can live off of without having to touch the prize money, says Goff. “You could be much more conservative than say someone with a more typical portfolio,” he says. “Risk taking becomes more of a luxury than a necessity.”

Of course, the reality of winning could be much more complicated when one considers phone calls from distant relatives, student debt and life-long dreams of owning a business. Winners will probably have to dip into their principal, for instance, if they want to set up a private foundation for children with disabilities or buy their high school a new wing, says Brian Kazanchy, a wealth manager with RegentAtlantic Capital in Morristown, N.J. They might also want to buy companies rather than just invest in them. For that reason, Kazanchy recommends separating a portion of the winnings to cover large one-time expenses like charitable foundations, family trusts and a business ventures. The rest of the cash can then be invested conservatively to cover living costs, he says.

Most people buying a Mega Millions ticket today will find the odds aren’t in their favor: the chances of winning the Mega Millions jackpot on Friday are about one in 176 million, according to lottery officials. And even those who win may have to fight for their share. But that doesn’t stop people from dreaming about it. Indeed, psychologists say just the act of playing the lottery and fantasizing about what one would do with the winnings makes the jackpot feel more attainable. “The enormous amount attracts attention and people inevitably think of what it might mean to win,” says Nobel-prize winning psychologist and behavioral economist Daniel Kahneman. “That thought, in turn, makes the event more plausible.”

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